Essay-Week 2

WEEK TWO ESSAY(The Numbers Say this is a Good Investment -- Right?)

Week 2 Essay Assignment - Good Investment Numbers.pdf

Olive Earle is the assistant to the financial manager at Cyberchamp Inc., a company that develops software to drive network communications for personal computers. Olive joined Cyberchamp 2 years ago, following her graduation from college. Her primary responsibility has been to evaluate capital budgeting projects and make investment recommendations to the board of directors. Olive enjoys her job very much; she often finds herself challenged with interesting tasks, and she is paid extremely well.

Last week Olive started evaluating the capital projects that have been proposed for investment this year. One proposal calls for Cyberchamp to purchase NetWave Solutions, a company that manufactures circuit boards called network cards, which are required to achieve communication connectivity between personal computers. Cyberchamp packages network cards with the software that it sells, but it currently purchases those circuit boards from another manufacturer. The proposal, which was submitted by Nadine Kowkabany, Cyberchamps CEO, suggests that the company might reduce costs and increase profit margins by producing the network cards in-house.

Olive barely had time to scan the proposal when she was summoned to Mrs. Kowkabanys office. The meeting was short and to the point. Mrs. Kowkabany instructed Olive to make the numbers for NetWave Solutions look good because we want to buy that company. She also gave Olive an evaluation of NetWave completed two years ago by an independent appraiser that suggests NetWave might not be worth the amount that Cyberchamp is willing to pay. Mrs. Kowkabany instructed Olive to find a way to rebut the findings of the report.

Olive was troubled by the meeting.Her gut feeling was that something was wrong, but she hadnt yet had time to carefully examine the proposal. In fact, her evaluation was very cursory, and she was far from making a final decision about the acceptability of the proposed capital budgeting project. Olive felt she needed much more information before she could make a final recommendation.

Olive has spent the entire day examining the appraisal report provided by Mrs. Kowkabany and trying to gather additional information about the proposed investment. The report contains some background information concerning NetWaves operations, but crucial financial data are missing. Further investigation into NetWave Solutions has produced little information. Olive has discovered that the companys stock is closely held by a small group of investors. These investors own numerous businesses and contribute generously to the local university, which happens to be Mrs. Kowkabanys alma mater. In addition, Olives secretary has informed her that the gossip around the water cooler at Cyberchamp suggests that Mrs. Kowkabany and the owners of NetWave are old college buddies, and that she might even have a stake in NetWave.

This morning, Mrs. Kowkabany called Olive and repeated her feelings concerning the purchase of NetWave. This time she said: We really want to purchase NetWave. Some people might not believe so, but its a very good deal.Its your job to make the numbers workthats why we pay you the big bucks! As a result of the conversation, Olive has the impression that her job might be in jeopardy if she doesnt make the right decision. This added pressure has made Olive very tense.

Make sure your essay addresses the following key questions:

Is Olive facing an ethical dilemma?Why or why not?

What should she do? What would you do if you were Olive? Would your answer change if you knew Mrs. Kowkabany had recently sold much of her Cyberchamp stock?

Should rumors and innuendos be considered in the capital budgeting analysis? Why or why not?

If Olive was certain her job hinged on this capital budgeting decision, should she produce the results requested by the CEO? Why or why not?

What are some other examples of product failures that may (or may not) have been due to ethical dilemmas?